Swiss gold referendum held as Kremlin looks to buoy platinum and palladium prices with state purchases…

The CENTRAL BANKS of Russia and Switzerland are weighing the merits of buying gold and other precious metals, but for very different reasons.

Now holding the world’s 5th largest state gold reserves, Russian central bank chiefs plan to meet with officials from South Africa – the world’s No.1 platinum mining nation – to discuss buying platinum and palladium in the open market to support prices, according to a Kremlin official.

Moscow’s precious metals and gems repository, Gokhran, already holds unreported quantities of palladium, of which Russia is the No.1 mine producer. Gokhran’s director, Andrey Yurin, last month repeated comments he made in May about returning to buy palladium in 2015, after focusing on buying gold this year.

The Swiss National Bank meantime faces a popular vote on buying gold – aimed at re-instating the Franc’s bullion backing – but is campaigning against the move.

Voters in Switzerland in 1999 approved an end to the legal requirement for gold reserves to back the Franc’s value, and approved large sales starting at what proved two-decade lows, now some 70% below current prices.

To win a place on Switzerland’s next referendum, scheduled for 30 November, the “Save Our Swis Gold” initiative secured over 100,000 signatures on a petition. Its proposals risk the central bank’s ability to ensure price stability and stable economic growth, finance minister Eveline Widmer-Schlumpf said Tuesday. Peter Hegglin – head of the Swiss cantons’ conference of finance directors – also joined SNB president Thomas Jordan’s repeated calls for voters to reject the move.

The Swiss National Bank would on one estimate need to buy perhaps 1,500 tonnes of gold to meet the referendum’s terms, which set a minimum 20% gold target for the SNB’s balancesheet, swollen through quantitative easing to buy Euros and maintain the Franc’s peg against its weak, neighboring currency on the forex market.

“Palladium is not a gold and currency reserve,” said Russian palladium miner Norilsk’s CEO Vladimir Potanin this spring, when Gokhran hinted it was considering buying the precious metal. “It should be sold rather than bought by the state…We could help, and not only by buying those volumes, but by marketing the deal.”

Named by Moscow’s minister for natural resources Sergei Donskoi as being involved with the proposed Russian-South African cartel, Norilsk said in late September it is raising funds to buy palladium from the Russian government, according to Bloomberg.

“My initial reaction is they could probably do it,” says US law professor Harry First, commenting to specialist site Mineweb on the proposed Russia-South Africa cartel. Apparently aimed at buoying metal prices after platinum and palladium hit multi-year lows in the open market, such a move would however face strong opposition from PGM consumers led by auto-makers, not least in China.

Between them, Russia and South Africa account for four-fifths of the world’s known platinum-group reserves as yet unmined.

GOLD MINING output worldwide is set to peak and then “plateau” in 2014, according to the leading data analysts, as today’s lower prices force producers to cut exploration spending in a bid to boost profit margins.

Forecasting a 10% drop in the average market price to $1270 per ounce for full-year 2014 (currently at $1290), “The mining sector is increasing production this year,” says the consultancy, “with a number of important projects coming into production and/or ramping up to full capacity, having benefited from investment flows in earlier years when prices were much higher.”

But new investment is now being cut back, meaning that “longer term, the production profile is likely to come under pressure” with 2014 marking what Thomson Reuters GFMS calls “a cyclical top for mine production.”

Over the first half of the year, global gold mining output rose 4% worldwide from January-June 2013, led by increases from China, Australia and Russia – the top 3 producer nations.

Gold mining output fell however in the next 3 major producers – the United States, South Africa and, most sharply, Peru. There, the giant Yanacocha project, the world’s biggest operational gold mine at its peak a decade ago, saw the quality of gold ore drop 65% from a year before.

Better “husbandry” and falling energy prices mean the average cash cost of mining 1 ounce of gold fell 6% by mid-2014 from a year before, Thomson Reuters GFMS explains. But thanks to the slump in world market prices, the industry’s basic profit margin has fallen 25% year-on-year, it says.

Attempting to cut costs further, the gold mining industry’s “closures or suspensions have so far been limited to small or ageing operations,” the report says. But there have also been “deferrals of major development-stage projects”, because the last “turbulent year” in precious metals at one point saw gold’s market price dip below the mining industry’s average cost of production when exploration and new development expenses are included.

In the stock market this has also led to “a market sell-off that has severely depressed mining valuations.” Mergers and takeovers remain “anemic”, with no “blockbuster consolidation plays” despite continued approaches from Newmont – the world’s No.2 gold mining company – to the world No.1 Barrick aimed at saving $1 billion per year across their operations in Nevada, USA.

Today’s lack of corporate activity in the gold mining sector, says Bernard Dahdah at French investment and bullion bank Natixis’s London office, contrasts with the “mine acquisition frenzy” of the decade-long bull market in gold prices. Then major companies were “typically purchasing mines at the higher end of the cost curve.” Miners also failed to protect themselves against any drop in prices, remaining “unhedged” after finally closing in 2009-2011 the huge forward sales made at prices 80% lower at the turn of the century.

Gold producers, says Dahdah, “are now resorting to consolidation at the lower end of the cost curve. Exploration budgets are also being cut back.”

Cost-cutting across the base metals sector is being driven further by slowing global demand, reports specialist news and data provider Platts.

“Companies are not only becoming leaner and meaner because the old regimes…became too profligate when commodity prices were high,” writes Paul Bartholomew, Platts’ managing editor for steel in Australia. “Rather, they are responding to a slowing China and subdued global economy.”

DAVID SADOWSKI is a mining equity research analyst at Raymond James Ltd., and has been covering the uranium and junior precious metals spaces for the past six years.

Here he tells The Gold Report‘s sister title, The Mining Report, why the current bear market in junior uranium miners will prove only temporary…

The Mining Report: In past interviews with Streetwise Reports, you predicted that the price of uranium will rise this year. But that has not panned out. Why not?

David Sadowski: Simply put, there is a short-term supply problem in the uranium industry. We believe, however, in the long term, supply will not be able to keep up with demand growth. The point at which we previously expected demand to outstrip supply has been pushed out by a couple of years. That development has impacted the price in recent months, as well as Raymond James’ outlook for the price going forward.

The three main reasons for continued global growth of uranium mine production are the persistence of long-term fixed-price sales contracts, the intransigence of government producers who believe that security of supply is more important than mine economics, and byproduct uranium production. Secondary supply sources also remain robust.

TMR: Would you explain how these situations interrelate?

David Sadowski: Demand is lagging because Japan has been slower than expected to resume operations at its nuclear reactors. The Japanese reactors are not consuming uranium at the moment, but the Japanese utilities are continuing to take delivery on many of their supply agreements, causing their inventories to rise. A belief in the market that uranium might be dumped has, in part, kept other global utilities on the sidelines, resulting in lower levels of uranium buying and lower prices. And while uranium oxide “yellowcake” deliveries have continued to Japanese buyers, those buyers have slowed the movement of that material into the rest of the fuel cycle, which has decreased demand for conversion and enrichment products.

On the enrichment side, excess capacity has resulted in “underfeeding”. The centrifuges at the enrichment plants are always spinning. The plants are paid to supply a certain level of enrichment to their customers. And during times of lower demand, they can utilize otherwise empty centrifuges to squeeze out more uranium product.

An apt metaphor for this process is orange juice. Imagine that you are running a juice bar with 10 juicing machines that are always spinning. Your customers bring you oranges and sign a contract to take delivery of a set amount of juice from those oranges. But suddenly you lose 20% of your customers. They stop bringing you oranges and they no longer pay you for the juice. What are your options to make up for that lost revenue? Given that all 10 juicing machines must continue to run, you can take the oranges that would under normal circumstances be squeezed by eight machines and instead run them through 10 machines, squeezing more juice out of each orange. The juice in excess to what the eight remaining customers have agreed to buy is available to the juice bar owner to sell to other customers.

That is the same type of activity that is going on in the uranium space. Enrichers with excess capacity especially during a period of relatively weak enrichment or “SWU” prices can squeeze more enriched product out of the material being provided to them, which generates excess uranium that the enrichers sell to others. Given the protracted outage of Japanese nuclear reactors, this squeezed source of supply has been greater than expected. In part due to our revised estimate that only one-third of Japan’s nuclear fleet will return to operations, we expect underfeeding to continue to exacerbate oversupply for some time.

TMR: What about the uranium extracted from Russian nuclear warheads?

David Sadowski: Similarly, with respect to Russia, the end of the Megatons to Megawatts high-enriched uranium (HEU) deal was long anticipated to usher in a new period of higher uranium prices. But the same plants that were used to down-blend those warheads can now be used for underfeeding and tails re-enrichment. In this way, the Russian HEU-derived source of supply that provided about 24 million pounds to the market did not disappear completely; the supply level was just cut roughly in half. Meanwhile, uranium mines, in aggregate, have increased their output – even though prices are now well below average production costs. Kazakhstan, for example, has continued to grow its uranium industry, despite recent guidance from officials in Kazakhstan to the contrary.

Furthermore, since Fukushima, only one major uranium mining operation has closed down due to weak prices. The high-cost Ranger mine in Australia, which has been processing its stockpiles since 2012, has defied protests from locals and restarted production following a major accident in late 2013. And Cigar Lake in Canada and Husab in Namibia are charging into production, even in this oversupplied environment. The bottom line is that oversupply will persist until 2020.

TMR: How will that solemn reality affect future prices?

David Sadowski: Current prices are untenably low and some producers are refusing to sell at rock-bottom prices. Upward pressure on prices into the $35 per pound range should occur as utilities buy more uranium in the marketplace, and as secondary trading activity among financial entities picks up. The biggest factor is the behavior of the end-users of uranium, the nuclear utilities. Given what we know from available data, global utilities are going to have to sign a lot of new supply contracts to meet their uncovered reactor requirements in the years 2017 and beyond.

But looking at current utility-held inventories and the global supply/demand picture over the next five years, we predict that the utilities will not be rushing to sign new deals. A major upswing in prices toward mine incentivizing levels of $70/lb is thus at least a couple of years down the road. The spot price is $28/lb today. It should average $35/lb in 2015 – a 20% rise and we see US$70/lb in 2018. Furthermore, it should be noted that this outlook can change in a split second. A flood at Cigar Lake, sanctions against Russian nuclear fuel exports, a major mine shutdown – if any of these events occur, the equation changes and prices could rise a heck of a lot faster, comparable to the rise in 2006–2007 and in late 2010.

TMR: What do you look for in a uranium mining junior?

David Sadowski: The best junior opportunities are to be found in companies with best-in-class assets, access to capital, and the potential for value-added news flow. Solid management teams, clean capital structures and trading liquidity are also key.

TMR: Is there synergy in going after both uranium and gold?

David Sadowski: Uranium deposits can occur alongside other metals, improving mine economics. In South Africa and Australia, uranium is mined as a byproduct of gold with a positive impact at those mines. In other cases, gold, nickel, molybdenum, and other metals can be an encumbrance to primary uranium production and can negatively impact costs.

GOLD PRICES moved in a $5 per ounce range Monday morning in London, holding below $1295 as world stock markets rallied from last week’s drop.

With political leaders and royalty from Western Europe today marking the centenary of the First World War, Russia’s defence ministry said its airforce is holding military exercises near the Ukraine border.

Israel offered a 7-hour ceasefire to militants in Gaza as a “humanitarian window”.

Silver meantime bucked the slight fall in gold prices, edging 0.2% higher after failing to rally with on Friday following much weaker-than-forecast US jobs data.

“One slightly negative figure does not a bull market make for gold,” says David Govett at brokers Marex Spectron in London.

With gold prices still below the “psychologically” important $1300 level, “Unless there is further serious unrest in any of the trouble spots in the world…we remain pretty much rangebound.”

Bandits from the self-proclaimed Islamic State yesterday seized two small towns in Iraq’s northern Kurdish region.

Gunmen linked to the same al Qaeda offshoot also traded fire with Lebanese soldiers near the border town of Arsal, Reuters reports.

“Good economic data,” reckons Commerzbank’s commodities team in Frankfurt, “are likely to put the subject of interest rate hikes back on the Fed’s agenda. That should reduce the relative attractiveness of gold and silver and preclude any sharp rises in price.”

“With the US economy picking up steam,” agrees Edward Meir for US brokerage INTL FCStone, “investors will have to start discounting higher rates down the road [because] the Fed is running out of wiggle room.”

Together with that risk of rising rates, Meir concludes, “sluggish investor and jewelry demand does not make the upside case for gold particularly persuasive…Even Chinese intake [is] now flagging.”

After new Hong Kong data last week showed a marked drop in gold exports to China’s mainland for June, down to a 17-month low, “a slide in Chinese demand will take away a key supporting factor for gold prices,” says David Levenstein in South Africa for the Rand Refinery, “[which are] already pressured by an improving global economy and US stimulus withdrawal.”

Speculative traders in US futures and options last week cut their overall bullish position in gold – net of bearish bets – by 9% from the previous week to a notional 512 tonnes of gold bullion, new data from US regulator the CFTC showed after Friday’s close.

Overall, the total number of gold futures and options contracts now open fell at the fastest pace since November to hit a 5-year low.

But with the world’s largest gold ETF – the SPDR Gold Trust (NYSEArca:GLD) – adding 11 tonnes to its holdings last month to 801 tonnes, exchange-traded gold notes as a whole rose 15.7 tonnes in July, “the first monthly net inflows since March and the largest since November 2012,” according to one bank analyst.

PAUL RENKEN has a broad range of experience in various aspects of the mining and minerals business, starting his career as a geologist for Canadian junior resource companies in the western United States.

Owning a stake in a private consulting firm as vice president of exploration, Renken searched for various base metals, precious metals and industrial minerals. Then, after working in UK equity market media outlets, he joined VSA Capital as mining analyst in 2006.

Now in the lazy days of summer 2014, Paul Renken sees a lot of value in the junior resource space, as he explains in this interview with The Gold Report…

The Gold Report: VSA Capital recently published a research report that reads, “One of the key parts of exploration funding and the acceptance of risk versus monetary reward was the considerable correlation between share price appreciation and the reduction of geological risk.” However, this no longer seems to be the case. What’s broken?

Paul Renken: What has transpired for the last couple of years, particularly in the junior and very small-cap exploration space, is that the money to find deposits and advance them along the risk profile to a bankable state has largely disappeared. The Dollars required to define a resource have been viewed by the market as an opportunity to sell shares to take advantage of any short-term price strength. From the long-term shareholders’ point of view, the money was wasted. Companies should have sat on the cash and not bothered with any exploration.

The directors of these companies need to realize that at the early stages of a project, they have to consider the probability of finding a significant deposit and how much it’s going to cost to define it. Investors, and institutional investors in particular, are looking for very low costs of discovery.

TGR: Has that become part of your investment thesis for junior resource equities?

Paul Renken: Yes, we’re looking to bottom-fish particularly good stories with good deposits that have languished for some time but that are now showing good economics. There are many firms out there seeking capital but there just isn’t much capital to finance all of them, or even the majority. If you’re going to commit capital to bring some of these stories to production, why not cherry-pick the best stories and the best deposits at the most economical cost? The smaller you get in the resource space, the good deposits or good corporate stories are available at very low valuations simply because the sector has been so out of favor for so long.

TGR: When is risk capital going to return to the sector?

Paul Renken: The exploration side of the business, a subsector of the mining space, needs to show that it has the same or greater potential for a return on investor capital versus other sectors. It is a competition for the available Dollars among all the different companies in all the different sectors – as well as debt capital and currency markets – not just other mining companies.

We seem to be at the bottom or bouncing along the bottom in the small-cap mining space. I’m looking forward to seeing some signs, likely in a matter of weeks, that we have seen the bottom of the market.

TGR: Where in the bulk commodity space should investors look for performing equities?

Paul Renken: Companies that have a strong component of their earnings in industrial metals – lead, zinc, nickel, etc. – should do better than those in the iron ore space.

TGR: You cover a number of industrial commodities, including tungsten. Tungsten has the highest melting point of any metal, but at $370 per metric ton unit, it’s not exciting many investors. What’s the investment case for tungsten?

Paul Renken: Tungsten’s primary use is in carbide cutting tools, essentially a proxy for manufacturing activity. If the banks and governments across the world are going to get the economy moving faster, they have to increase manufacturing activity. Manufacturing activity means being able to create, cut and sell metal – everything from fabricated products to metallic tools to sheet metal, including auto body panels.

Auto manufacturing is increasing in both China and the United States. And because China wants to maintain its manufacturing dominance, it is no longer exporting tungsten as it did in the 1980s, when it essentially swamped the worldwide tungsten market. These days, some sources say as much as three-quarters of the arable land in China is contaminated. The Chinese must address this issue and that means no longer accepting quick and dirty methods of metals production. We expect Chinese tungsten exports to continue to tighten, and therefore tungsten should have fairly robust demand going forward.

TGR: What’s your view on the REE space in general?

Paul Renken: I’m positive on the REE space. Further down the food chain there are a number of interesting REE stories with simpler mineralogy that should require simpler plants and processes to produce REE. That means their capital expenses should be a lot less, too. The Chinese have controlled REE production for a number of years but China is trying to seize greater control of the market inside its borders because there has been so much illegal REE mining and smuggling.

The Chinese realize that the volatility experienced in REE pricing just a few years ago caused many end users to seek alternatives. The subsequent steep decline in REE prices has been difficult for Chinese REE producers. By the same token, annual REE demand growth is in the high single-digit range. That’s expected to continue for some time.

TGR: In a February 2014 interview, you told us that investors should be in precious metals, gemstones and uranium. While precious metals’ prices were up in the first half of this year and the diamond equities you mentioned have performed, uranium continues to flounder. Is it as simple as asking investors to have more patience?

Paul Renken: It certainly has been a disappointment for uranium investors and for analysts who can see that it should be performing much better. The issue is that Japan has not brought its nuclear program back on-line. Japan has a surplus of uranium from long-term contracts that it can’t use because those reactors are not operating.

Japan is forced to resell that material for whatever it can get. This is costing the Japanese economy billions. How long will it continue to do this? It has already gone on longer than any of us anticipated. The government intends to bring these reactors back on-line at some point, when it is satisfied that it is safe to do so.

TGR: What should investors do?

Paul Renken: If they are still holding uranium equities, they must decide whether it’s worth holding that position. A few uranium equities out there are definitely good bottom-fishing situations because the grade or size of the deposit dictates that they will be put into production as long as there is a global nuclear industry.

TGR: Could you give us an overview on the nickel space?

Paul Renken: The nickel space has been quite interesting ever since the Indonesian export ban went into effect in January. It’s done wonders for the value of nickel. The price moved to the $9 per pound range from about $6.50/lb. We expect nickel to stay in that range until Chinese pig iron producers are able to source other nickel-laterite ore or cheap nickel concentrates. Until a source is found, we think the price will remain strong.

TGR: Do you want to discuss gemstones?

Paul Renken: The fundamentals for diamonds were looking quite good at the end of 2013 and that has proven to be the case. Most diamond equities, particularly the producing equities, are showing nice gains this year. That’s based on improvements in both cut and raw stone prices on the auction tenders of these companies over the first seven months of 2014. US and Asian retail demand continues to improve and we’re comfortable projecting further gains.

TGR: In a report titled, “Emerging Market Forex and the End of the Commodity Market Super-Cycle,” Goldman Sachs says that bulk commodities, like iron ore, copper and oil, will see five years of price softness to the tune of $80 per ton iron ore, $6,600 per metric ton unit copper and $100 per barrel for Brent crude. Do you concur?

Paul Renken: We’ll probably see some volatility in that very flat marketplace. Goldman Sachs is quoting prices that are 10-20% under the current prices, yet some of these prices are moving in the opposite direction. For instance, geopolitical risk is pushing up the price of Brent crude.

To reach $3/lb or lower for a sustained period, copper would require a significant surplus over the next five-year period. The amount of copper coming into the market has been consistently lower than analysts’ projections. Last year, there was a slight deficit. There may be as much as a 400,000-tonne surplus this year in my view, but that isn’t significant enough to sway prices. I would peg the five-year average copper price closer to $3.20 per pound.

As far as iron ore is concerned, it may try to test $80 per ton at some point, particularly if there’s a decline in steel output in China. I suspect that the overall average for five years would be closer to $90-100 for 62% iron cost and freight.

TGR: Parting thoughts?

Paul Renken: I’m hopeful that we are looking at the bottom for mining equities. We may see another trading range for gold and for silver. Silver is certainly playing out according to what we had anticipated at the end of last year. Gold is a bit stronger than we had expected, largely because of geopolitical risk and retail interest from Asian investors. Platinum group metals prices are looking quite good and will continue to because of labor risk in South Africa and geopolitical risk in Russia. Overall, we see strength in a number of different commodities. It’s time for equities to catch up.

BYRON KING writes for Agora Financial, editing their flagship Outstanding Investments plus two other newsletters, Real Wealth Trader and Military Technology Alert.

Studying geology and graduating with honors from Harvard University, King also holds advanced degrees from the University of Pittsburgh School of Law and the US Naval War College. He has since advised the US Department of Defense on national energy policy.

Now he says global unrest and inflation will play a role in improving fundamentals for gold and silver, as he tells The Gold Report here. But miners have to control costs and clean up their internal cash flow, too…

The Gold Report: Byron, gold is above $1300 per ounce – although not by much – and silver topped $20 per ounce. What was holding their prices down, and what are the fundamentals that will move the prices going forward?

Byron King: The short answer is that, for all its faults, the Dollar has strengthened, which holds down gold and silver prices. The longer answer is that gold and silver are manipulated metals. That is, the world’s central banks have an aversion to things they can’t control, and one of the things that they can’t control is elemental metals like gold and silver.

Let’s ask why the Dollar has strengthened. The US is probably in its weakest geopolitical situation in decades. The Wall Street Journal on July 17 had a front-page story about the confluence of crises across the world – Ukraine, Middle East, Southeast Asia – all of which are profound challenges to American power militarily, diplomatically and economically. But the Dollar is still holding up. Why?

I believe the dramatic recent increase in US energy production is what’s behind the stronger Dollar. With more oil and natural gas from fracking, the US is the world’s largest energy producer. In addition, we’re importing far less oil and exporting a lot more refined product. It helps the Dollar.

Still, when I look at the big picture for gold, I see a resource whose production is challenged on the best of days. Gold mining output is declining in the major traditional sources: South Africa is in decline; Australia is challenged; some of the big plays in Nevada are getting long in the tooth.

TGR: Is there a cycle that builds on itself? As the gold price goes down, companies – especially the majors – spend less on exploration and development, which depletes their reserves, production declines and their costs increase. Are we in that part of the cycle where lower prices are setting the stage for less supply and the need for a higher gold price later?

Byron King: Yes, exactly. Falling supply and static price makes a classic economic case. We are setting the stage for less supply and higher prices. The market is dancing around the reality, but it’s still the reality. Consider that, in the last year or so, gold has been as cheap as $1200 per ounce. In late March or early April, the price almost touched $1400 per ounce. That’s a 16-17% price swing in two months. Is this the sign of a well-balanced market?

Now consider how macro-events drive things. In the first half of 2014, geopolitical events – Ukraine, Syria, Iraq – drove the gold price. And to me, these locales bring it back to that Dollar-energy relationship.

Iraq produces 2.5 million barrels per day of exportable oil. In June, when it looked as if Iraq might not survive, the idea of those 2.5 million barrels being taken out of the market helped drive the price of gold from $1240 per ounce to over $1300 per ounce.

Or look at Ukraine. It straddles key gas export lines to Europe, and the situation involves Russia, which is one of the world’s largest energy producers. Problems with Russia, let alone sanctions and such, affect perceptions of future energy supply, which tends to benefit the Dollar.

All in all, where is the gold price headed? Long-term, I think the answer is up. Inflation is not going away. I think that the central banks of the world, and the people who run university economic departments and train the leaders of the future, really do believe that we ought to have long-term inflation. If that is indeed where they’re coming from, you need to own gold and silver.

I think the long-term prospects for demand – the long-term prospects for gold as money and as backing for money – are much better than they used to be.

TGR: Given the volatility that you discussed and the challenges of the US Dollar, is there significant retail and institutional cash on the sidelines waiting to find the confidence to jump back into precious metals, as commodities and mining equities?

Byron King: There is an immense amount of money waiting for the next step. In the last few years, the big indexes have done incredibly well; everything has gone up, from airlines to consumer electronics, Silicon Valley, aerospace. A lot of people have made a lot of money in the big markets and in traditional investments.

Now, where does it all go? All that recently minted money needs a new home. If you have balance sheet appreciation from the large caps and the big blue chips, you’re looking for something else. My sense is that a lot of people are looking at the basic resource sector.

We have already seen some of that money step back into the market in the first half of this year. Some of the highest-quality small and midsized mining plays have seen large moves.

TGR: The last time we talked, you explained that, in the context of history, we’ve just entered the early stages of the materials revolution, using advanced forms of graphite and rare elements. Can you give us an update on that revolution?

Byron King: When you get into the graphite space, you quickly realize that graphite is more of a technology play than a basic resource play. There is a materials revolution going on with carbon, certainly with graphite. It’s extremely investable, but you have to have patience, and be willing to learn some complex new science. If an investor doesn’t want to become educated on the high-end carbon chemistry that’s happening out there, this could become an uncomfortable space in a hurry.

Look at it this way. If I mine gold, silver or copper, I can sell it to pretty much anybody, from dentists to jewelers to wire makers to electronic makers. The end users will buy it as long as there is a basic spec or quality to it.

Graphite is different. Once you mine it, what you do with the graphite depends on who your user is. The end user has a specific use in mind – battery anodes, fire suppression, heat dissipation, high-strength materials – that requires an entire industrial chain that has to happen between the mouth of the mine and the end user.

TGR: Do you have any words of wisdom for investors who are trying to decide when to enter the market?

Byron King: We’ve seen several strong investment points for gold and silver in the last six months. Right now, I think we might be due for a summer correction, although geopolitical events seem to be exploding all over the place. Sorry, but I just don’t have a subscription to next week’s Wall Street Journal. My issue only comes every morning.

Still, we’ve got tremendous volatility. Just in the time we’ve been talking, the price of gold dropped $33 per ounce [Mon 14 July] which is a bit of an eye-opener. It makes you want to look at the rest of the world and see what’s going on, what might have prompted that drop.

The question for the investor is, what are you going to do? Well, if there’s a downdraft to gold and silver prices, then you want to be involved in companies that can get their costs down faster than the market can beat down the price. But whatever happens day to day, I think metal prices will go up over the long term, because of inflation.

When it comes to picking companies in which to invest, you need to be willing to diversify across many ideas. While it’s great to put a lot of money into a couple of plays and see one or two do really well, that’s usually not the way life works. In the small-cap resource space in particular, you need to find 6 to 10 quality plays – or more – and spread your investments around.

Then you need to watch carefully, and be willing to cut your losses. You also need to be ready for surprises on the upside. When a company gets a takeout offer or has a good piece of news from the drill rig, you can see fabulous gains flowing to patient investors. Just remember that, when good things happen, you need to sell some shares and take some of that gain off the table.

TGR: Byron, it’s always a pleasure. Thanks for your time and your insights.

I DON’T want to say that mainstream analysts are stupid when it comes to China’s gold habits, writes Jeff Clark, senior precious metals analyst and editor of Big Gold at Casey Research.

But I did look up how to say that word in Chinese…

One report claims, for example, that gold demand in China is down because the Yuan has fallen and made the metal more expensive in the country. Sounds reasonable, and it has a grain of truth to it.

But as you’ll see below, it completely misses the bigger picture, because it overlooks a major development with how the country now imports precious metals.

I’ve seen so many misleading headlines over the last couple months that I thought it time to correct some of the misconceptions. I’ll let you decide if mainstream North American analysts are stupid or not.

The basis for the misunderstanding starts with the fact that the Chinese think differently about gold. They view gold in the context of its role throughout history and dismiss the Western economist who arrogantly declares it an outdated relic. They buy in preparation for a new monetary order – not as a trade they hope earns them a profit.

Combine gold’s historical role with current events, and we would all do well to view our holdings in a slightly more “Chinese” light, one that will give us a more accurate indication of whether we have enough, of what purpose it will actually serve in our portfolio, and maybe even when we should sell (or not).

The horizon is full of flashing indicators that signal the Chinese view of gold is more prudent for what lies ahead. Gold will be less about “making money” and more about preparing for a new international monetary system that will come with historic consequences to our way of life.

With that context in mind, let’s contrast some recent Western headlines with what’s really happening on the ground in China. Consider the big picture message behind these developments and see how well your portfolio is geared for a “Chinese” future…

#1. “Gold Demand in China Is Falling”

This headline comes from mainstream claims that China is buying less gold this year than last. The International Business Times cites a 30% drop in demand during the “Golden Week” holiday period in May. Many articles point to lower net imports through Hong Kong in the second quarter of the year. “The buying frenzy, triggered by a price slump last April, has not been repeated this year,” reports Kitco.

However, these articles overlook the fact that the Chinese government now accepts gold imports directly into Beijing.

In other words, some of the gold that normally went through Hong Kong is instead shipped to the capital. Bypassing the normal trade routes means these shipments are essentially done in secret. This makes the Western headline misleading at best, and at worst could lead investors to make incorrect decisions about gold’s future.

China may have made this move specifically so its import figures can’t be tracked. It allows Beijing to continue accumulating physical gold without the rest of us knowing the amounts. This move doesn’t imply demand is falling – just the opposite.

And don’t forget that China is already the largest gold producer in the world. It is now reported to have the second largest in-ground gold resource in the world. China does not export gold in any meaningful amount. So even if it were true that recorded imports are falling, it would not necessarily mean that Chinese demand has fallen, nor that China has stopped accumulating gold.

#2. “China Didn’t Announce an Increase in Reserves as Expected”

A number of analysts (and gold bugs) expected China to announce an update on their gold reserves in April. That’s because it’s widely believed China reports every five years, and the last report was in April 2009. This is not only inaccurate, it misses a crucial point.

First, Beijing publicly reported their gold reserve amounts in the following years:

500 tonnes at the end of 2001;

600 tonnes at the end of 2002;

1,054 tonnes in April 2009.

Prior to this, China didn’t report any change for over 20 years; it reported 395 tonnes from 1980 to 2001. There is no five-year schedule. There is no schedule at all. They’ll report whenever they want, and – this is the crucial point – probably not until it is politically expedient to do so.

Depending on the amount, the news could be a major catalyst for the gold market. Why would the Chinese want to say anything that might drive gold prices upwards, if they are still buying?

#3. “Even with All Their Buying, China’s Gold Reserve Ratio Is Still Low”

Almost every report you’ll read about gold reserves measures them in relation to their total reserves. The US, for example, has 73% of its reserves in gold, while China officially has just 1.3%. Even the World Gold Council reports it this way.

But this calculation is misleading. The US has minimal foreign currency reserves – and China has over $4 trillion. The denominators are vastly different.

A more practical measure is to compare gold reserves to GDP. This would tell us how much gold would be available to support the economy in the event of a global currency crisis, a major reason for having foreign reserves in the first place and something Chinese leaders are clearly preparing for.

The following table shows the top six holders of gold in GDP terms. (Eurozone countries are combined into one.) Notice what happens to China’s gold-to-GDP ratio when their holdings move from the last-reported 1,054-tonne figure to an estimated 4,500 tonnes (a reasonable figure based on import data).

At 4,500 tonnes, the ratio shows China would be on par with the top gold holders in the world. In fact, they would hold more gold than every country except the US (assuming the US and EU have all the gold they say they have). This is probably a more realistic gauge of how they determine if they’re closing in on their goals.

This line of thinking assumes China’s leaders have a set goal for how much gold they want to accumulate, which may or may not be the case. My estimate of 4,500 tonnes of current gold reserves might be high, but it may also be much less than whatever may ultimately satisfy China’s ambitions. Sooner or later, though, they’ll tell us what they have, but as above, that will be when it works to China’s benefit.

Most mainstream analysts point to the slowing pace of China’s economic growth as one big reason the gold price hasn’t broken out of its trading range. China is the world’s largest gold consumer, so on the surface this would seem to make sense. But is there a direct connection between China’s GDP and the gold price?

Over the last six years, there has been a very slight inverse correlation (-0.07) between Chinese GDP and the gold price, meaning they act differently slightly more often than they act the same. Thus, the Western belief characterized above is inaccurate. The data signal that, if China’s economy were to slow, gold demand won’t necessarily decline.

The fact is that demand is projected to grow for reasons largely unrelated to whether their GDP ticks up or down. The World Gold Council estimates that China’s middle class is expected to grow by 200 million people, to 500 million, within six years. (The entire population of the US is only 316 million.) They thus project that private sector demand for gold will increase 25% by 2017, due to rising incomes, bigger savings accounts, and continued rapid urbanization. (170 cities now have over one million inhabitants.) Throw in China’s deep-seated cultural affinity for gold and a supportive government, and the overall trend for gold demand in China is up.

One lament from gold bugs is that the price of gold – regardless of how much people pay for physical metal around the world – is largely a function of what happens at the Comex in New York.

One reason this is true is that the West trades in gold derivatives, while the Shanghai Gold Exchange (SGE) primarily trades in physical metal. The Comex can thus have an outsized impact on the price, compared to the amount of metal physically changing hands. Further, volume at the SGE is thin, compared to the Comex.

But a shift is underway. In May, China approached foreign bullion banks and gold producers to participate in a global gold exchange in Shanghai, because as one analyst put it, “The world’s top producer and importer of the metal seeks greater influence over pricing.” The invited bullion banks include HSBC, Standard Bank, Standard Chartered, Bank of Nova Scotia, and the Australia and New Zealand Banking Group (ANZ). They’ve also asked producing companies, foreign institutions, and private investors to participate.

The global trading platform was launched in the city’s “pilot free-trade zone,” which could eventually challenge the dominance of New York and London.

This is not a proposal; it is already underway. Further, the enormous amount of bullion China continues to buy reduces trading volume in North America. The Chinese don’t sell, so that metal won’t come back into the market anytime soon, if ever. This concern has already been publicly voiced by some on Wall Street, which gives you an idea of how real this trend is.

There are other related events, but the point is that going forward, China will have increasing sway over the gold price (as will other countries: the Dubai Gold and Commodities Exchange is to begin a spot gold contract within three months).

And that’s a good thing, in our view.

#6. “Don’t Be Ridiculous; the US Dollar Isn’t Going to Collapse”

In spite of all the warning signs, the US Dollar is still the backbone of global trading. “It’s the go-to currency everywhere in the world,” say government economists. When a gold bug (or anyone else) claims the Dollar is doomed, they laugh.

But who will get the last laugh?

You may have read about the historic energy deal recently made between Chinese President Xi Jinping and Russian President Vladimir Putin. Over the next 30 years, about $400 billion of natural gas from Siberia will be exported to China. Roughly 25% of China’s energy needs will be met by 2018 from this one deal. The construction project will be one of the largest in the world. The contract allows for further increases, and it opens Russian access to other Asian countries as well. This is big.

The twist is that transactions will not be in US Dollars, but in Yuan and rubles. This is a serious blow to the petroDollar.

While this is a major geopolitical shift, it is part of a larger trend already in motion:

President Jinping proposed a brand-new security system at the recent Asian Cooperation Conference that is to include all of Asia, along with Russia and Iran, and exclude the US and EU.

Gazprom has signed agreements with consumers to switch from Dollars to Euros for payments. The head of the company said that nine of ten consumers have agreed to switch to Euros.

Putin told foreign journalists at the St. Petersburg International Economic Forum that “China and Russia will consider further steps to shift to the use of national currencies in bilateral transactions.” In fact, a Yuan-ruble swap facility that excludes the greenback has already been set up.

Beijing and Moscow have created a joint ratings agency and are now “ready for transactions…in Rubles and Yuan,” said the Russian Finance Minister Anton Siluanov. Many Russian companies have already switched contracts to Yuan, partly to escape Western sanctions.

Beijing already has in place numerous agreements with major trading partners, such as Brazil and the Eurozone, that bypass the Dollar.

Brazil, Russia, India, China, and South Africa (the BRICS countries) announced last week that they are “seeking alternatives to the existing world order.” The five countries unveiled a $100 billion fund to fight financial crises, their version of the IMF. They will also launch a World Bank alternative, a new bank that will make loans for infrastructure projects across the developing world.

You don’t need a crystal ball to see the future for the US Dollar; the trend is clearly moving against it. An increasing amount of global trade will be done in other currencies, including the Yuan, which will steadily weaken the demand for Dollars.

The shift will be chaotic at times. Transitions this big come with complications, and not one of them will be good for the Dollar. And there will be consequences for every Dollar-based investment. US-Dollar holders can only hope this process will be gradual. If it happens suddenly, all US-Dollar based assets will suffer catastrophic consequences.

In his new book, The Death of Money, Jim Rickards says he believes this is exactly what will happen. The clearest result for all US citizens will be high inflation, perhaps at runaway levels – and much higher gold prices.

Only a deflationary bust could keep the gold price from going higher at some point. That is still entirely possible, yet even in that scenario, gold could “win” as most other assets crash. Otherwise, I’m convinced a mid-four-figure price of gold is in the cards.

But remember: It’s not about the price. It’s about the role gold will serve protecting wealth during a major currency upheaval that will severely impact everyone’s finances, investments, and standard of living.

Most advisors who look out to the horizon and see the same future China sees believe you should hold 20% of your investable assets in physical gold bullion. I agree. Anything less will probably not provide the kind of asset and lifestyle protection you’ll need. In the meantime, don’t worry about the gold price. China’s got your back.

We think you don’t have to worry about silver either, because we think it holds even greater potential for investors. In the July Big Gold, we show why we’re so bullish on gold’s little cousin, provide two silver bullion discounts exclusively for subscribers, and name our top silver pick of the year. Get it all with a risk-free trial to our inexpensive Big Gold newsletter.

“Without a significant ‘bid’ from institutional players, any upside for prices will be limited.”

Tuesday saw another jump in the number of Put options on August and Sept. gold futures, according to Thomson Reuters data, which offer the holder a profit if prices fall.

“For the time being,” say analysts at market-maker Barclays, “we are allowing for further range trading over the coming 3-6 months as gold is caught between the prospect of higher US yields, inflationary expectations, and geopolitical rumbles.”

Over on the currency markets, the Euro touched a 1-month low near its lowest since February after new data showed US factory-gate inflation beating analyst forecasts in June, with prices up 0.4% from May.

The British Pound briefly spiked to new 6-year highs after UK unemployment showed a drop to 6.5% in June.

UK wage growth badly lagged consumer-price inflation, however.

Spot gold priced in British Pounds recovered to £760 per ounce, some 2.8% below last Friday’s 15-week closing high.

Barrick Gold – the world’s largest single gold miner – meantime said its CEO Jamie Sokalsky will step down in September.

Building a gold price “hedge book” equaling well over 600 tonnes of future production by the time spot gold bottomed in 2001, Barrick (NYSE:ABX) then quit those hedges early as prices rose, buying back the last 90 tonnes at what were then record-high prices in 2009.

Barrick chairman John Thornton – who does not plan to replace Sokalsky near-term – said on taking the role last year that he “always thought it made great sense to hedge.”

“The pendulum has swung and the view is evenly split,” says a survey of investor attitudes to gold miner hedging released today by US bank and London bullion market-maker J.P.Morgan.

Having found 70% of clients against gold miner hedging in 2011, J.P.Morgan says the split is now “50% for and 50% against.”

After a disappointing 2013, the commodities market came roaring back full throttle, outperforming the S&P 500 Index by more than 4 percentage points and 10-year Treasury bonds by more than 6.

Leading the rally was nickel, delivering a 37.14% return, followed by palladium (17.70%) and gold (10.90%). Nickel also saw the largest gain from last year, climbing more than 55 points to settle close to $19,000 per metric tonne. Gold jumped 38 percentage points to $1,327 an ounce, and palladium rose 16 points to $843 an ounce.

At the back of the herd lagged lead, copper and wheat, which was the best performer only two short years ago.

Below you can see the 2014 halftime edition of our periodic table of commodity returns, which has proven to be a perennial favorite among our investors.

That commodity prices often fluctuate so wildly supports the need to have your investments in the resources space diversified and actively managed by an experienced team of professional investors. Simply put, there are far too many worldly factors – some of them political, others acts of God, all tugging and pulling at the market in tandem – for any one person to reasonably keep track of. It’s important to have a limber group of managers and analysts with the expertise and diligence to monitor and anticipate the most pressing global trends.

What we know is that now many investors have become bullish on resources. At a conference in New York at the end of last month, Credit Suisse polled 350 investors and found that 42% of them were planning to be overweight in commodities in the coming months. For some perspective, when the same question was asked of them the previous year, only 19% had a rosy attitude toward commodities.

As I said, what a difference six months – or, in this case, a year – can make. With money flowing back into commodities, the market is finally trying to reverse the downtrend that we’ve been up against since 2011.

As usual, government policy is often a precursor to change. Nowhere did we see this adage in action more transparently this year than in Indonesia, whose government shocked the market in January by enacting an outright ban on nickel ore exports. Because the Southeast Asian country is the world’s second-largest producer of nickel ore, accounting for about a fifth of global supply, any alteration to its export policy was bound to send far-reaching ripples throughout the market.

China, one of the leading importers of not just Indonesian nickel but other global raw materials as well, reacted by stockpiling the silvery-white metal, 75% of which is used worldwide in stainless steel production. This in turn encouraged investors to drive prices even higher out of fear of a supply shortage.

A repeal of the export ban is unlikely to happen in the near-term, as both Indonesian presidential contenders, Joko Widodo and Prabowo Subianto, who are both claiming victory in the recent election, favor its continuation. We will keep our eyes on nickel, as a correction might very well come when and if the ban is ever rescinded.

Prices of the platinum group metals (PGMs) hit three-year highs following the double whammy of a five-month-long miner strike in South Africa and trade sanctions against Russia, the world’s leading producer of palladium. Fear of a shortage in PGMs, which are essential to the production of catalytic converters in automobiles, drove prices skyrocketing.

This comes at a time when US auto sales have surged to 16.9 million in June alone, an increase of 9.2% over the same time last year. Auto manufacturing is expected to grow 10.3% in the third quarter, according to International Strategy & Investment (ISS).

Although the labor strike ended last month, PGM production cannot reasonably resume within the next three to five months. And with a separate strike underway, this one led by the National Metalworkers of South Africa, country leaders fear yet another economic setback that has already threatened a third of South Africa’s manufacturing output.

Regarding gold, we believe we intimately understand the dynamics of both the Love and Fear Trade in the global goldmarket. We also know how to read and act on China’s positive purchasing managers index (PMI), which has recently hit a six-month high of 51. Any number over 50, of course, indicates strong growth in the manufacturing sector. China is already the world’s largest producer and consumer of gold, and because its middle class is swelling in rank – the country is expected to have over 670 million middle class citizens early next decade – gold sales should remain robust.

Besides China, other global drivers of gold consumption at this time include India and the Middle East. Diwali – otherwise known as the Indian Festival of Lights – Christmas and other international celebrations encourage generous giving of gifts, of which gold jewelry is one of the most traditional and popular. Ramadan, scheduled to end on July 28, involves a type of alms-giving called zakat, which is one of the Five Pillars of Islam. Zakat is obligatory for all observant Muslims, who handsomely give precious metals such as gold to those in economic hardship.

“So we’re coming to that trough on a seasonal pattern, and that seasonal pattern is predominated by what I call the Love Trade, where you have jewelry demand, et cetera, coming out of Asia, Middle East and India…And this is the first time that we had what they call the Flash HSBC PMI. And this is very important for job creation and GDP per capita rising, and that’s highly correlated with consumption of gold for the jewelry trade. So the second half [of 2014] looks great, and I think it’s also very important for all exports of any resources.”

Although not one of the top leaders in the first half, crude oil deserves a shout-out. Its 7.06% annual return is closing in on the 7.19% return in 2013, when oil was the second-best performer. Because of unrest in Iraq, North Sea Brent crude has set a record for trading between $107 and $112 a barrel for 12 consecutive months, handily beating the 170 consecutive days in 2008 when it traded over $100 a barrel.

In its monthly energy report, the US Energy Information Administration (EIA) forecasts that 2015 will represent the highest level of West Texas Intermediate (WTI) crude production since 1972. Global consumption of oil, driven largely by China once again, is expected to reach 94 million barrels a day (bbl/d) by the end of next year.

Global Resources Fund (MUTF:PSPFX) portfolio manager Brian Hicks reiterates these points on why we are bullish in light of the current domestic oil production boom:

“Within our portfolio, we are investing heavily in the shales through upstream oil and gas companies, oil services companies and equipment companies. Shale is transformational; it is really changing the energy landscape. Almost overnight, companies are developing resources that are long-lived and repeatable. Remember, only five years ago we were talking about peak oil. Now, we’re producing roughly 8.4 million bbl/d. That’s the highest we’ve seen since the mid-’80s. It is a trend that is going to continue.”

Even though the commodities market has so far exceeded everyone’s expectations this year, especially following a lackluster 2013, a correction could occur with little warning. That’s why the portfolio managers of PSPFX, Gold and Precious Metals Fund (MUTF:USERX) and our World Precious Minerals Fund (MUTF:UNWPX) are constantly looking out for opportunities and threats as well as ensuring that the fund is optimally diversified to protect against changes in the market.

For now, however, it appears as if resources could continue their strong performance for at least the near-term and hopefully much longer.

Gold output from world No.3 faces new project delays after 2013 price drop…

GOLD MINING output in Russia rose 21% in the first 5 months of the year according to preliminary data.

Reaching record levels of 254 tonnes in 2013, total gold bullion output rose almost 30% according to Sergei Kashuba, head of the Russian Gold Industrialists’ Union, between January and May compared to the same period last year, with recycling included.

Annual data from consultancy Thomson Reuters GFMS show that gold mining supply from Russia over the past decade has risen 40%, overtaking the United States in 2013 and making it the third largest producer nation behind China and Australia.

Early 2014’s rise in Russian gold mining supply was beaten by a significant rise in gold recyled from secondary sources, says Kashuba. “Gold bar production from scrap more than doubled on the year to 11.8 tonnes,” he told the Itar-Tass news agency.

The 5% drop he forecast in February for full-year mine production was due to “postponed projects” which remain unlikely after the sharp price drop of 2013.

Gold price in Dollars lost 28% last year – the biggest annual loss in 32 years. Russia’s largest gold miner, Polyus Gold (LON: PGIL), has since delayed the start of Natalka, which has productive potential for 47 tonnes per year. Two other Russian gold miners, Petropavlovsk (LON:POG) and Nord Gold (FRA:RTSD), also plan to cut output in 2014, contributing to the lower annual outlook.

Last week Polyus Gold announced a gold miner hedging program to defend against the risk of further price falls, locking in a price of $1321 per ounce. Petropavlovsk hedged some of its output in March 2013 at a price of $1663 for 12 months – beating the actual price by 25% – and then hedging more at $1403.

Formerly a million-ounce miner, POG’s output target for 2014 is now 625,000 ounces – below 20 tonnes of gold, and down 15% from 2013’s full-year total.